John Dorfman: Markets blind to political colours

Opinion

I've been struck in recent weeks by the number of my Republican clients and friends who hold strong feelings against President Barack Obama. They see him as a socialist who will ruin the US economy.

Most people I know are convinced that their party, be it Democrat or Republican, is best for the country, the economy and the stock market.

Yet an objective look at the evidence shows that neither party holds a decisive edge in stock market and economic performance.

An analysis by Tommy McCall, former information graphics editor of Money magazine, was published in the New York Times in October.

It showed the average annualised stock market return under every US president beginning with Herbert Hoover.

Bill Clinton, a Democrat, led the field with a 15.2 per cent compound return in the Standard & Poor's 500 Index, not counting dividends. The next four best performers were all Republicans - George H.W. Bush (11 per cent), Dwight D. Eisenhower (10.9 per cent), Gerald Ford (10.8 per cent) and Ronald Reagan (10.2 per cent).

Next on the list were five Democrats - Harry S. Truman (8.2 per cent), Lyndon B. Johnson (7.7 per cent), Franklin D. Roosevelt (7.5 per cent), Jimmy Carter (6.9 per cent) and John F. Kennedy (6.5 per cent).

Tenth and 11th places went to two Republican presidents under whom returns were negative - Richard Nixon (down 3.9 per cent) and George W. Bush (down 5.1 per cent). Worst was Hoover, a Republican, with a 30.8 per cent compound annual rate of decline.

Of course, it's debatable how much a president influences the economy and securities prices. Clearly, the Federal Reserve plays a role, as do market forces and plain luck. Clinton, for example, benefited from the technology boom of the 1990s.

Another interesting way of looking at the data comes from a report issued by Ned Davis Research of Florida. The study presented more than 100 years of stock market data spanning March 4, 1901, through July 8, 2008.

Measured by simple price appreciation on the Dow Jones Industrial Average, Democratic presidents have been better for the stock market than Republican ones. The average annual price gain in the Dow has been 7.2 per cent under Democrats and 3.6 per cent under Republicans.

What about inflation? Under Republican presidents, inflation has been held to 1.9 per cent per year. Under Democrats it has run to 4.6 per cent a year.

Inflation-adjusted, the annual price gain in the Dow industrials has averaged 2.5 per cent under Democratic presidents and 1.7 per cent under Republicans. The figures still favour the Democrats, just not by much.

Ned Davis, head of the research firm, says that both bonds and stocks do better when one party controls the White House and the other party controls Congress. He's right, and I would go a step further by observing that the ideal combination for stocks has been a Democratic president and a Republican Congress.

Under that combination, stocks have jumped 9.6 per cent per year, excluding dividends.

Price gains have averaged 6.6 per cent when Democrats control both the White House and the Congress. When the Republicans hold the presidency and the Democrats control Congress, gains have averaged 5.7 per cent.

The worst scenario has been one in which Republicans snag both the presidency and congressional control. In that situation, the average Dow gain is just 1.6 per cent. (Again, the Republicans look better if inflation is considered). I had always thought the stock market preferred a strong presidency and a popular president. I was surprised a few days ago to see a New York Post article saying that high poll ratings for a president correlate with mediocre stock market returns over the ensuing 12 months.

It turns out that the Post was citing data from Ned Davis Research. The Davis folks plotted weekly values for the president's approval in the Gallup poll and measured the price gain in the Dow 12 months from that date.

When the president's approval rating was 65 or higher, the gain over the next 12 months averaged only 2.4 per cent.

When approval was 50 per cent to 65 per cent, the average gain was 6 per cent. And when approval was between 35 and 50 per cent, the best gains were achieved, averaging 12.3 per cent. Presumably, the lesson is that when things don't look too rosy, there's room for them to improve.

A president can be too unpopular, though. Ratings below 35 per cent (Nixon late in his term, and Carter twice) were associated with a stock market loss of 13.8 per cent over the ensuing 12 months.

Here's one more tidbit. The election cycle exerts a powerful influence on stock prices.

In the third year of a presidential term, the Ned Davis team found, the Dow appreciates by a median 15.2 per cent. That number is based on 27 presidential cycles going back to William McKinley in 1900.

For the election year itself, the average price gain is 7.6 per cent. The second year (when mid-term elections are held) shows only a 2.1 per cent gain. And the first year of a president's term shows a loss, on average, of 0.6 per cent.

Of course, there are exceptions - in fact, this year appears to be one. Still, the presidential-cycle tendencies are real, and they exist for a logical reason. Presidents like to take economic and political pain in their first year. By the third year, both Congress and the President are priming the pump in an attempt to induce popularity and win re-election.

* John Dorfman is a Bloomberg columnist and a registered Democrat.